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Rural-Urban Income Inequality under Financial Development and Trade Openness in Pakistan: The Econometric Evidence

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Microsoft Word - [18] Muhammad Shahbaz.doc ©The Pakistan Development Review 46 : 4 Part II (Winter 2007) pp. 657–672 Rural-Urban Income Inequality under Financial Development and Trade Openness in Pakistan: The Econometric Evidence MUHAMMAD SHAHBAZ, NAVEED AAMIR and MUHAMMAD SABIHUDDIN BUTT 1. INTRODUCTION Pakistan is a developing economy, which has adopted Structural Adjustment Programme (SAP) in the form of economic reforms initiated in early 1990s. Economic reforms related to privatisation of state-owned assets, deregulation, confiscation of price controls, trade liberalisation generally and financial reforms (especially to improve quality of financial institutions) particularly. The objective of such reforms was to improve the welfare of society but these reforms never fruited to every livelihood in the country. Perhaps, fruits of economic reforms are eaten up by poor governance, lack of transparency in economic policies, high level of corruption, high burden of internal and external debts and interest rate payments on these debts, weak situation of law and order, and improper implementation of economic policies. All this resulted in widespread poverty, which has pervasive effects on global and local communities. The unequal distribution of resources adding to material deprivation makes life courses further difficult for millions of people. Thus, all these issues of poverty and income inequality have frequently been raised internationally on a premise that nation cannot progress when a vast segment of society is deprived of it’s due share. If we look at those countries, which are able to acquire rapid economic growth for instance, China, this growth has been accompanied by remarkable increases in inequality. China is among those countries, which has the highest level of inequality in the world [World Bank (1997) and Chang (2002)]. This shows that growth no doubt is a necessary condition but not the sufficient condition for the alleviation of

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